On the Recent Stock Market Decline and Non-Performing Loans

Peter Tasker (Arcus Investment)

This commentary originally appeared in the "Japan-U.S. Discussion Forum" (http://lists.nbr.org/japanforum) on October 10, 2002: posted here with the author's permission.

May I make a few observations on the NPL debate from the non-theoretical perspective of an actual investor ?

The recent stock market decline, also the vaporization of \180 trillion of stock market wealth since the Koizumi administration took over, cannot be caused by the zombies and basket cases. The reason is simple. These stocks have already fallen sharply over the past decade, by 99% in some cases, and now have microscopic market values. They are simply not large enough to have any impact on the overall market. Even the big banks together are worth only about 8% of total market value. But market value has fallen four times that much in the past three months!

In reality the stocks of the very highest quality companies – such as super-efficient retailer Ito Yokado, down 44% since May – also have been brutalized. It would take too long to go into detail, so you just have to trust me on this one. What the Japanese stock market is currently experiencing is not a healthy weeding out of inefficient companies, but a generalized panic. To reverse it, the authorities will need to convince us that they are not going to crash-land the economy.

Finally as a point of logic, it is perfectly possible to believe both that asset prices were abnormally high in 1990 and are abnormally depressed now. For example many Japanese stock market indices are back to the levels of 1983, well before the start of the bubble. If the Nikkei Index had merely tracked nominal GDP since then, it would be at 17,000. And through most of the nineties it did indeed fluctuate around that level. Only with the coming of Koizumi did the bottom fall out. Now all Japanese asset markets - stocks, real estate and government bonds - are priced for long-term deflation and economic contraction.